What is Back Testing?
Back testing is a trading strategy that involves the task of analyzing historical data related to the investment opportunity. The results of the investigation are then compared to the current status of the investment. This is to determine if there are any indications of favorable trends. Here is some information about how back testing works, why it is important to work with accurate data, and what can happen if the back testing is conducted improperly. One of the key things to understand about back testing is that the process relies a great deal on running simulations. While is it not unusual for any investment to be ran through a series of simulations based on the number of shares bought or sold, the concept goes a little deeper with back testing. Not only are simulations run based on the current status of the stock or share performance; simulations are also run on the past performance of the investment. This extra mile of predicting trading cycles and performance levels based on past
It is simply this: You program an idea, for example, the idea of going long when price closes above the 50ema, and, then, you test it using data from the past. Reports are generated, giving you a variety of statistics, and the ever-important net amount from the trades. The first thing I did was back test the concept of CCI crossing the centerline for long and short trades. The results I experienced with these tests were AMAZING! I was going to be RICH! I started daydreaming about long vacations in the south of Spain and a new motorcycle, and, and…..and I found a slight programming error in my code. I ran the tests again and received results that were just plain pitiful. Dang! Looks as though my next trip to Spain was going to be like my last one: Strap on a backpack and go to cheap 2-star hotels. Oh, well! You still meet more interesting people in places like that. But, darn it all, I really wanted that new Italian Moto Guzzi motorcycle I’ve been drooling over, so I persevered. Over
